OpenMarkets Education

Warrants

Warrants are a type of derivative issued by a small number of financial instructions. They are traded on the ASX or Chi-X, and settlement occurs through CHESS.

Warrants derive their value from an underlying instrument, including:
> shares
> a basket of securities
> Exchange Traded Funds (ETFs)
> a share price index
> debt instruments
> currencies
> commodities

Warrants give holders the right to buy or sell the underlying instrument to the warrant issuer for a specific price, according to the terms of issue. Warrants are generally categorised as either a trading warrant or investment warrant, although some have characteristics of both.

The following table summarises the key differences between the two:

 Investment warrantsTrading warrants
Why are they used?Borrow to invest in shares and increase exposure to potential capital growth, dividends and franking creditsTrade the rise or fall of shares, indices, commodities and currencies
FeaturesLonger dated and less frequently traded, lower risk/return profile and tend to have a higher initial outlay requiredFrequently traded and shorter dates, higher risk/return profile
Investment timeframeMedium to long termShort term
Key benefitsLeverage and no margin callsLeverage and no margin calls
Key investment risksLeverage can magnify lossesLeverage can magnify losses
Used bySMSFs and individual investorsSMSFs and individual investors
ExamplesEndowments and structured investment productsEquity warrants, index warrants, barrier warrants and MINI warrants

Source: ASX

An instalment warrant gives the investor the right to buy the underlying asset with an initial part payment and an optional final payment. Key features of instalment warrants include:
> The investor is entitled to all dividends, distributions and franking credits
> Generally offered over ASX100 securities
> They are an eligible form of gearing for SMSFs.

A MINI warrant is also available as either a trading or investment warrant.

It?s important to note that warrants don?t have standardised terms, although they are limited by the constraints of the ASX Operating Rules and the law.

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